Flexibility of new hires’ earnings in Ireland

The rigidity of the net present value of wages for newly hired workers from unemployment is one of the key ingredients to generate realistic volatility of (un)employment in standard search and matching models. With Nash bargaining or if wage contracts are long-term, this net present value is affected by wages of new hires. Yet data on wages of new hires are rare and, in the few papers that distinguish between new hires from unemployment and job changers, the findings vary. For the U.S., two influential papers reach the opposite conclusions, and the findings for the few European countries are mixed. We combine administrative tax data on earnings with the Household Finance and Consumption Survey for Ireland and find that earnings of new hires from non-employment are substantially more flexible compared to earnings of incumbent workers or job changers. The findings are robust. Earnings of new hires from non-employment are more procyclical for workers with less valuable outside options.